Mortgage Refinancing

An overview

When a home owner decides to refinance their mortgage loan, it is important to understand the reason for doing a mortgage refinancing and what to look out for. As there are many possible pitfalls along the way, some potential savings may not materialize. For example when people switch from a Fixed Rate package to a Sibor Package, sometimes they forget that Sibor is a temperamental monster that fluctuates. Or they forgot about some packages that tie them into some unfavorable terms and conditions. Sometimes they go into some packages with hefty penalty on redemption. Sometimes people sign up to a Balloon interest schemes where the interest rate gradually increase, if the valuation falls, by the 2nd or the 3rd year, the person cannot refinance due to the fallen valuation and are locked into an expensive rate for several years.

Step 1:

Financial Vulnerability and Affordability Check

If you are refinancing, you should also understand why you are Refinancing. Remember, refinancing may not make sense for everyone.

Understand your own financial situation.

Are you comfortable with the current mortgage repayment?

Identify what are the factors that could affect your ability to service your monthly installment. E.g. If you lose your job or if you lose that big deal or commission, if the economy suddenly turns, if you get divorce (touch wood), if you fall ill, or if the bank raise interest rates, what is the shares I hold become worthless, etc.

Identifying these factors will make you better understand your own financial situation and what are the circumstances affecting your home loan serviceability.

Step 2:

Once you understand your financial situation, ACT on it. Does your current Home loan package expose you to some financial risks? Is it structured correctly? For example, you foresee a need to free up some cash for your child’s education in 2 years, should you extend your loan tenure from maybe 15 years to 30 years? (If you qualify) and free up cash as SAVINGS?

Step 2 emphasizes on covering GAPS and risks, so think of what the package should be/do to give you that safety. If your current package is variable rate package, maybe you want a simpler job and less pay, but you cannot withstand the fluctuation in rates, you may want to consider locking in some rates.

Maybe you foresee a need for some emergency cash and your property qualify for equity loans, you may want to apply for an equity loan to stand-by the cash for the coming 1 to 2 years in case you need it. (Home Loan rates range from 1+% to 5%, this is the cheapest loan you can get. Personal loans are at least > 6%, credit lines > 10%, credit cards >20%)

Step 3:

Step 1 and 2 is to prevent you from getting emotional and swayed to some "cheap rates" and so on, sometimes Cheap is good, sometimes Cheap will hurt you. We feel that first and foremost, you must consider your own financial situation, then zoom in on what the things that can help you in a loan. Then step 3, take at least 5 to 10 working days to search for banks packages offered by various banks.

Compare the rates (using Apple to apple, then using apple to oranges and find out what feels best)

Compare the terms and conditions
Compare and understand the structure of the loan
Compare the subsidies offered
Compare the penalties and it’s duration
Compare the exit clauses
Compare the features

Remember, many banks tell you it´s a standard package, sometimes it is negotiable.

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